The top 10 consumer trends defining China's emerging domestic market

With total consumer spending increasing by nearly 15% annually
over the past few years, China's domestic market is in the midst of
a boom. As the country's middle class expands, companies that sell
consumer goods are poised to serve consumers with a broader array
of high-quality products.

Richard Ho, a partner at Bain & Company in Shanghai,
identifies ten trends that will define the country's emerging
domestic market.

1. More middle-class shoppers in smaller
cities
As incomes rise, consumers in lower-tier cities will continue to
join the party and make classic middle-class purchases, beginning
with electronics and durable goods and then better quality,
fast-moving consumer goods (FMCGs) as the decade unfolds.

RELATED INSIGHTS

INDUSTRY EXPERTISE

2. More top-tier cities
By 2020, the number of top cities will surge from three — Beijing,
Shanghai and Guangzhou — to more than 20.

Some will be on the scale of Shanghai and Beijing.

Others will be half the size, but these huge urban centers will
have an increasingly sophisticated consumer population.

Shopper preferences will be similar across many segments and
they will be attracted more by brand names than in-store
promotions.

As trends like health and wellness and convenience take off,
merchants will cater to those preferences.

3. Diversified retail formats
Even by 2020, China will be more like Europe than the U.S., a mix
of income levels, regional tastes and shopper behaviors.

As a result, there will be a range of modern and traditional
formats, including hypermarkets, department stores, specialty and
mom-and-pop shops, wholesale markets and the internet.

Consumers will seek out specific formats for different types of
purchases and shop more online. In some categories like shampoo,
modern retailing now accounts for 50% of business in the top 200
cities. In many smaller cities, traditional outlets will still be
key players and will dominate several product categories.

4. Increased retail competition
China is increasingly important to multinationals and they will
continue to gain market share on their turf — modern formats like
hypermarkets, supermarkets and convenience stores. Some Chinese
retailers, meanwhile, will learn to compete well on the basis of
good locations, strong local relationships and differentiated local
offerings like fresh produce.

5. Consolidated distribution networks
In China's top cities, large manufacturers already distribute
directly to retailers. In the country's 300 to 500 rapidly growing
lower tier cities (tier-two, tier-three and tier-four markets),
they will selectively develop larger distributors that can grow
with their needs and provide broad coverage and in-store
support.

Over time, these large distributors will dominate in a single
province, because the ability to serve multiple provinces will take
longer to develop. Wholesalers will refocus on traditional trade in
lower tier cities and some will try to provide additional services
to better support manufacturers.

6. Multinationals will move ahead in the top
cities
Unlike in China's retail market, at least one multinational brand
will capture the number-one or number-two market share position in
many of the major food, beverage and personal-care categories
within China's top 200 cities.

This already is the case in sectors like snacks, beer,
sportswear and shampoo.

As consumers become more brand conscious, multinationals will
have a significant edge over local competitors that have yet to
develop strong brand equity.

7. Local companies will maintain leads in smaller
cities
Outside the top 200 to 300 cities, domestic companies will continue
to have a competitive advantage in consumer products for the
foreseeable future, as multinationals work to win a foothold.

8. New management strategies
In the decade ahead, multinationals need to hire more locals among
their top management. The frequent rotation of foreign managers,
usually once every three years, often leads to sub-optimal
decision-making. Local companies, meanwhile, will start moving from
the old top-down decision-making style and hiring professional
managers from multinationals to deepen the organizational expertise
needed to run much larger businesses.

9. Better product quality and safety
In the wake of highly publicized global and domestic product
recalls, China will overcome the worst of its quality control
issues over the next decade. The lessons China has learned from
these incidents will result in new safeguards like stiffer
enforcement of regulations, improved shipping and storage
conditions and manufacturers differentiating themselves based on
quality. Also, consumers will be willing to pay more for better
quality and safer products.

10. No global Chinese FMCG brand by 2020
Despite regional and global growth, it's unlikely that a Chinese
FMCG brand will become a global leader by 2020. Domestic firms
still are learning how to use consumer insights to develop their
brands and gain the cultural understanding needed to successfully
manage distributors and company employees in overseas markets.

As the new decade begins, domestic companies have a unique
opportunity to win against multinationals in the biggest
battleground on the planet: China's booming domestic economy. It
will take a strategic approach to customers, costs, channels and
competition. If they succeed, the next ten years will be heralded
as the decade when China makes major strides-moving halfway towards
reinventing its own brand.